December 1, 2016

Taxation

Key materials

Taxation by its nature is involuntary and compulsory. Through coercion, taxation levies a financial charge on individuals and entities, limiting their opportunities to invest, save, or spend in the ways that they see fit. In this index, states with less taxation are scored as better protectors of opportunity than states with more taxation. The HOAP index’s Taxation Subindex evaluates three areas of state taxation that relate to health care: (1) provider taxes, (2) health savings account (HSA) taxes, and (3) medical device taxes. 

The first indicator refers to the level of taxation that states place on healthcare providers, including nursing homes and inpatient facilities (though usually not individual physicians). Funds from provider taxes can be used for any state purpose, including education and transportation, but are often worked back into state Medicaid programs to trigger the release of federal matching funds. In some cases, the tax is partially paid back to providers in the form of increased reimbursement rates. Some states have multiple provider taxes in place. Other states have repealed their provider taxes, usually in the belief that the taxes were ineffective and unfair and drove physicians out of state. Since the rates and types of provider taxes differ and cannot be directly compared, the indicator evaluates states on the basis of the number of taxes they collect.

The second indicator evaluates whether and how much states tax HSA contributions and HSA earnings. Health savings accounts are special accounts individuals can use to save money for medical expenses. Paired with a high-deductible health insurance policy, an HSA can be an important piece of responsible planning for healthcare expenses. HSAs form part of the foundation of the consumer-directed healthcare movement, as they “shift the locus of rights and responsibilities for financing health care from governments and employers toward consumers.” With an HSA, individuals can save during their healthy years for unpredictable medical expenses in later years. HSAs are undercut, however, when their tax-advantaged nature is either revoked or never granted in the first place. Most states do not tax HSA contributions—these states scored highest for this indicator. Some states, however, do tax HSA contributions, and some states tax HSA earnings.

The third and final indicator concerns state taxes on medical devices, which are distinct from the federal medical device tax that was enacted in the ACA and is currently suspended. Medical devices are generally defined as instruments, apparatuses, machines, implements, and other items that are used in the cure, treatment, or prevention of disease. Drugs are not considered medical devices, but durable medical equipment such as wheelchairs, crutches, and prosthetic aids typically are. Some states do not tax medical devices because they are nontaxing states for essentially all retail goods. Other states do tax retail goods but offer an exemption for medical devices if the purchaser has a prescription for the device. These exemptions range from very broad and all-encompassing to relatively narrow (e.g., limited to just certain classes of items, such as ostomic items, prosthetics, and oxygen components and systems). States with fewer medical device taxes scored higher on this indicator.